Today, all eyes will be on the government’s new forecasts on the rate of inflation and economic growth this year because these revisions will offer an early glance at how hard the increases in electricity and fuel prices will hit the economy.
Last month, the government announced it would relax its 16-month-long freeze of fuel prices and implement sweeping and drastic electricity and gasoline price hikes because both state-run CPC, Corp Taiwan and Taiwan Power Co are on the brink of bankruptcy amid the rising import costs of oil and coal.
You do not need to use a crystal ball to see that the Directorate-General of Budget, Accounting and Statistics (DGBAS) will trim its GDP forecast from its previous estimate of 3.84 percent annual growth and will raise its 1.46 percent annual increase target for consumer prices.
Consumer prices will reach an annual growth rate of 1.98 percent, the Taiwan Institute of Economic Research (TIER) said on Wednesday last week.
That means the nation’s inflation will very likely exceed the Cabinet’s 2 percent growth target as the rise in gasoline prices and electricity bills will add a combined 0.7 percentage points the 1.46 percent growth in consumer prices that the DGBAS predicted for this year.
Taiwan’s GDP is predicted to expand at a 3.48 percent annual rate this year, slower than the previously expected 3.96 percent, as higher consumer prices will curb private consumption amid stagnant household income, TIER said. Contributing to slow growth was the fragility of the global economic recovery, it added.
In light of these forecasts, why are the DGBAS’ new projections are of any importance? They matter because they are a key point of reference for the Cabinet and the central bank when formulating their policies to fight the risk of inflation and safeguard economic growth. Forecasts made by private researchers like TIER or investment banks do not count.
DGBAS’s new forecast, if it exceeds the 2 percent growth target for inflation, would force the administration to face the problem of rising inflation and push government agencies to do more to narrow the gap between how people feel about the price situation and what the government does.
The public has felt the pinch of rising inflation as prices have spiked in a wide range of necessities. However, Vice Premier Jiang Yi-huah (江宜樺) — who heads of a special task force assigned to prevent companies from using higher gasoline and power rates as an excuse to gouge product prices — has said that consumer prices have remained “stable.”
For the central bank, the DGBAS projection will also be an important reference point on which to revise its own inflation prediction and adjust its monetary policy.
It will be a tough job for central bank Governor Peng Fai-nan (彭淮南). Peng said last month that fighting inflation was the bank’s main priority when deciding the levels of key interest rates.
The bank kept the benchmark interest rates unchanged for the third consecutive quarter as Taiwan’s consumer price index only rose 1.31 percent annually in the first two months of this year.
Now that the situation has changed, the central bank seems to be in favor of a stronger local currency against the US dollar instead of tightening money supply to combat the risk of inflation, as the appreciation of the New Taiwan dollar would stop prices of imported commodities from rising dramatically.